Italian deadlock knocks stocks, euro off early highs
POLITICAL UNCERTAINTY TO BE A DRAG ON ITALY ECONOMY AS STOPGAP LEADER IS NAMED
European stocks gave up early gains and bond yields recovered from lows as early elections loomed in Italy after the anti-establishment 5-Star and League parties abandoned plans to form a government.
European stocks were a mixed bag, after Asian shares mostly gained on signs the United States and North Korea were still working towards holding a summit.
Early in the European session, the euro, Italy’s government debt and its FTSE MIB stock index all rose in opening trades. But those gains quickly dissipated.
Italian concerns
European stocks were trading flat on the day and Italian bond yields were up 3 basis points on concern new elections would turn into a debate on euro membership.
“We doubt this rally in markets has legs as what this means is that the next election in Italy becomes a referendum vote on euro membership,” said Frederik Ducrozet, senior European economist at Pictet Wealth Management.
Italian President Sergio Mattarella yesterday asked former International Monetary Fund official Carlo Cottarelli to head a stopgap government.
His refusal to accept as economy minister Paolo Savona, who had threatened to pull Italy out of the euro, forced the 5-Star and the League to abandon efforts to form a government.
The euro initially rallied 0.6 per cent to $1.1728 (Dh4.3071), pulling itself above 6 1/2-month lows, but headed back towards the day’s lows to trade only 0.1 per cent higher at $1.1655.
The single currency strengthened by 0.8 per cent against the Swiss franc, rebounding from near three-month lows to trade at 1.1629, but also gave up much of those gains.
Italian 10-year bond yields had dropped 10 basis points to 2.35 per cent in early trade, coming off one-year highs, but investors quickly booked profits, pushing yields up 3 basis points on the day.
Italy’s FTSE MIB index turned negative on the day after climbing 1.4 per cent earlier as financials and utilities stocks surged.
“If there are new elections in autumn, then the populists are likely to get a stronger share and a more extreme mandate,” said Peter Chatwell, head of European rates strategy at Mizuho International.
Europe’s STOXX 600, and Germany’s DAX were flat on the day. MSCI’s main European index was down 0.1 per cent while its Asian counterpart rose 0.4 per cent as a retreat in oil prices from record highs helped sentiment.